I have been asked several times this month whether there is a typical reaction in the market to "Tax Day" on April 15. As with most almanac investing (e.g. "sell in May," "Santa Claus rally" and "end of quarter window dressing"), I haven't found any good long-term research showing a reliable impact on the market.
Even if investors were consistently pessimistic or optimistic on Tax Day, the markets would have started pricing it in earlier and earlier until the phenomenon would be smoothed out. The same issue can be used to explain why other calendar-based economic signals are unreliable. Because it is easy for writers in the financial press to use the timing of Tax Day or other calendar events as a post-hoc explanation for whatever happened in the market that day, don't be surprised if you find some headlines that contradict my argument.
However, this is not to say that taxes and fiscal policy does not have an impact on the market. For example, the stock prices of health insurance companies have recently been falling as investors price in a greater risk of adverse regulation in pharmaceutical pricing and a Democratic-lead initiative for public health insurance that would harm or even eliminate their industry.
Despite a growing labor market, health insurance companies are down an average of 11% this year. Although most health insurer stocks are up today, this "safety sector" will likely continue to be a target for short sellers if the market slows again. As you can see in the following chart, shares of Aetna owner CVS Health Corporation (CVS) have been consolidating after falling 33% over the past three months. Resistance at $55 could be another target for shorts.
Poor performance in the health care insurance sector isn't a terminal problem for the S&P 500, but it will still drag on performance. Health care stocks constitute almost 14% of the index and the worst performing sector in 2019. In my opinion, the biggest issue that is preventing the S&P 500 from breaking trendline resistance seems to be weak risk-taking sentiment.
For example, as you can see in the following chart, the S&P 500 has been rising within a wedge pattern while small-cap stocks (a proxy for investor risk appetite) have been flat since February. This reminds me very much of market conditions in mid-2014, when investors were concerned about growth rates and shifted into large caps before market volatility in late 2014 started to ramp up.
I am not overly concerned that we will see a replay of market conditions from 2014 through 2015, but lack of confirmation from small-cap stocks should still justify a cautiously bullish outlook. In the short term, I still favor those groups that have clear signs of growth like retail and technology.
Risk Indicators – Conflicting Signals from the Banks
The bank reports have been mixed so far with positive surprises from JPMorgan & Co. (JPM) and The PNC Financial Services Group, Inc. (PNC) on Friday and disappointing results from Citigroup Inc. (C) and The Goldman Sachs Group, Inc. (GS) today. I was most enthusiastic about JPMorgan's consumer banking performance, which matched what we know about consumer spending and consumer financing from recent economic reports. However, Citigroup's announcement was almost a mirror image of JPMorgan's, with weakness in its sprawling consumer banking and financing divisions.
I don't think today's data is bad enough to spoil the outlook for the rest of the bank reports and consumer spending this year. Citigroup is in the middle of a long-term reorganization, and Goldman's reliance on trading revenue (down this quarter) swamped the small improvements it was able to make in some nascent consumer banking initiatives.
The disagreement between the bank reports has put a much greater emphasis on tomorrow morning's report from Bank of America Corporation (BAC). Like Citigroup, Bank of America has massive consumer banking divisions, and their results could tilt the market outlook more favorably if the report looks more like that of JPMorgan.
From a technical perspective, I think Bank of America stock will have to clear a high hurdle to see any price gains. The stock is bumping up against resistance at $30 per share, which could trigger some profit taking regardless of the data in the report. I expect that investors will have to consider the content within Bank of America's report apart from its price performance even if the company beats analysts' expectations.
Bottom Line – Looking Forward to Retail Reports
Earnings season is just launching, and there is usually a lull after the big banks release their reports and when the next tranche of releases from other stocks within the S&P 500 hit the market. However, there are a few consumer stocks due to release their earnings this week that could influence investor sentiment.
I am particularly interested in the report from Netflix, Inc. (NFLX) after the market closes tomorrow, April 16. Although shares are already under pressure from The Walt Disney Company's (DIS) recent move to compete with the streaming giant, Netflix's subscriber growth, pricing plans and content investments should confirm that the consumer is still healthy and willing to spend. Healthy growth at Netflix is a good thing for the market outlook in the short term.
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